When starting a business, it is important to think about what the future of your business looks like. This goes beyond the products or services you plan to sell and the model you have for generating revenue. It extends to the question of who will hold ownership of your company. Planning how you want to use ownership interests (or ‘equity’) from the beginning of your company can help you maximize growth opportunities and minimize the chance that you, a founder, will part with your equity too quickly.
To the extent that your business will seek investors to provide the cash needed to support growth, company founders can expect that they will need to give up some equity in exchange for the cash investment. However, you’ll need more than a business idea and some cash to build a successful company.
Ultimately, the success of your venture will be determined not by your efforts alone but by the performance of the cast of people — employees, partners, or associates — that you assemble. So, if there is a strategy that can help you get more out of the people on whom you depend and also boost your organizational horsepower, you owe it to yourself to take a serious look. A policy of sharing equity with employees that is designed and used wisely can be just that strategy. A generation ago, this practice was called ‘equity compensation’ and generally was limited to senior executives of large businesses. Today, the practice of putting company equity into the hands of all the people on whom the company counts to do the work has become increasing widespread — especially in innovation-based new ventures. It’s a strategy and vision that we call employee ownership.
• What Is an Employee Ownership Strategy?
• Does It Really Work?
• A Guiding Principal
• Allocating Equity among Founders and Employees
• Where Do the Shares Come From?
• Dynamic Equity — the ‘Grunt Fund’
• From Strategy to Tactics — Forms of Equity
• Other Equity Plan Design Factors
• Building a Forecast Model of Company Ownership
• So What’s Your Company Worth?
This module is part of the Beyster Institute at UC San Diego’s Rady School of Management Beyster Startup Toolkit, a comprehensive tool to assist the entrepreneur as they run their business.